Banks Survive Financial Stress Tests

U.S. banks need about $74.6 billion in extra capital after undergoing a series of financial stress tests by the Federal Reserve.

The stress tests involved over 150 examiners, accountants, economists, specialists and other officials from the Fed, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., and other regulatory agencies poring over the accounts of the 19 biggest financial institutions.

Nine of the healthiest banks do not require additional capital, including Goldman Sachs and Goldman Sachs, according to results released Thursday. Eight other banks can use more capital and either raise it on their own from private investors or convert their government investment in preferred shares into common stock. They include Wells Fargo, which could use another $13.7 billion, and Bank of America, which requires another $33.9 billion.

Two other firms will need to raise more capital on their own: GMAC needs another $9.1 billion and Regions Financial requires an extra $400 million.

These examinations were not tests of solvency, said Federal Reserve Chairman Ben Bernanke. We knew already that all these institutions meet regulatory capital standards. Rather, the assessment program was a forward-looking, what-if exercise intended to help supervisors gauge the extent of the additional capital buffer necessary to keep these institutions strongly capitalized and lending, even if the economy performs worse than expected netween now and the end of next year.

Treasury Secretary Tim Geithner emphasized that the results of the so-called Supervisory Capital Assessment Program were only one part of President Obamas plan to stabilize and repair the financial system and get credit flowing again.

Todays results should make it easier for investors to evaluate risk and to differentiate across institutions, he said. The stress test will help replace the cloud of uncertainty hanging over our banking system with an unprecedented level of transparency and clarity. This is important, as markets work best when they have full access to the information on which to make informed investment decisions. With better disclosure, private capital is more likely to flow into the financial system, which will accelerate the point at which banks can replace the governments investments.

Geithner acknowledged that some financial institutions would be required to take steps to improve the quality and quantity of their capital to give them a larger cushion to support future lending in case the economy takes another downturn. The banking supervisors applied a historically high set of loss estimates on the securities and loans, as well as a conservative view of potential earnings that could act as a buffer against those losses in the event of a more severe recession. He noted that the results are less acute than some had expected, in part because concerns about the risk of a more severe recession have diminished, the markets have improved, and banks, in anticipation of the release of the stress test, have acted in the last few months to increase their capital.

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